Union Pacific–Norfolk Southern Merger Targets Trucking Market Share

Union Pacific and Norfolk Southern say their proposed tie-up would shift millions of truckloads to rail, boosting competition while cutting pollution and congestion. (Brandon Bell/Getty Images)

Key Points

• Union Pacific and Norfolk Southern seek regulatory approval for a merger, arguing it would enhance freight competition and shift two million truckloads annually to rail.
• Railroads have lost 10 percentage points of market share to truckers over the past decade, with trucks holding up to 90% of the freight market in the Mississippi watershed.
• The merger is projected to add $2 billion annually to combined revenue, save $1 billion in operating costs, and reduce capital spending by $130 million per year.

The transcontinental railroad formed by merging Union Pacific with Norfolk Southern would enhance freight competition by giving shippers rail alternatives to trucking, the two railways argued in their 7,000-page request for regulatory approval.

Particularly in the Mississippi basin from Chicago to New Orleans, the companies said they could eventually shift two million truckloads a year to rail. That, they argued, would boost public welfare by cutting pollution and reducing highway congestion and accidents.

The benefits outlined in their Dec. 19 application to the federal Surface Transportation Board are aimed at meeting key approval requirements for a major rail merger: that the deal enhance competition and benefit the public, while protecting employees and the environment. The STB has a month to determine whether the application is complete, and then up to a year to consider input from shippers, transport rivals, and other agencies, including the Justice Department and the Federal Trade Commission.

The transcontinental merger is the rail industry’s main hope for reviving freight volumes, which have largely stagnated in recent years. That lack of growth has caused the stocks of Union Pacific and Norfolk Southern—along with those of CSX, Canadian Pacific Kansas City , and Canadian National Railway —to lag behind the broader stock market over the past five years, after outperforming it in the prior half decade amid industrywide cost-cutting.

On a conference call the day the application was filed, Norfolk Southern CEO Mark George said freight railroads have lost 10 percentage points of market share to truckers over the past decade. In the Mississippi watershed, trucks command as much as 90% of the freight market, because handoffs between railroads make rail service uncompetitive. About three-fourths of the market-share gains targeted by the merger would come from trucking, George said, with the remaining 25% coming from other railroads.

Union Pacific CEO Jim Vena told listeners that merging his Western railroad with Norfolk Southern’s East Coast network could convert thousands of piecemeal rail journeys into seamless end-to-end trips. He also vowed that the combined railway would protect existing rail yards and the jobs of current employees.

The application reiterates the financial benefits the companies have projected for the merger. Volume gains would add $2 billion annually to their combined revenue, while operating efficiencies would save $1 billion in costs. Another $130 million a year would come from reduced capital spending.

The filing does make one change from the financial projections released when the deal was announced in July, Raymond James analyst Patrick Tyler Brown noted in a Monday report. The railroads initially assumed they would forgo about half of the anticipated $2 billion of savings in annual cash-flow gains because of concessions required by regulators.

Now, the application assumes the STB will not require divestments or other givebacks. As a result, Union Pacific and Norfolk Southern expect to realize the full $2 billion in annual cash-flow gains by the third year after the merger closes.

Brown rates Union Pacific a Strong Buy and sees the stock rising to $270 from its current price of about $234.